Chinese premier pledges no short-term fixes as economy falters

Economy in transition towards consumption-led growth

China’s slowing economy was the backdrop to last week’s annual investment forum in Boao, on the holiday island of Hainan off southern China, where Premier Li Keqiang ruled out major stimulus to fight short-term dips in growth.

China’s economic slowdown has been widely flagged – the economy is maturing fast, and the government has made no secret of its aim to move it away from investment and export-driven growth towards economic activity based on consumption.

But the pace of the slowdown is still startling, especially after decades of double-digit growth rates in China.

Mr Li made his remarks as significant falls in imports and exports data reinforced forecasts that the world’s second-largest economy has slowed notably at the start of 2014.

Economists estimate gross domestic product rose 7.3 per cent in the first quarter from a year earlier, the slowest pace since 2009.

Li reiterated his line that job creation was the government’s policy priority and it did not matter if growth came in a little below the official target of 7.5 per cent.

“We will not take, in response to momentary fluctuations in economic growth, short-term and forceful stimulus measures,” Mr Li said in a speech. “We will instead focus more on medium to long-term healthy development.”

“We have set our annual economic growth target at around 7.5 per cent. It means there is room for fluctuation. It does not matter if economic growth is a little bit higher than 7.5 per cent, or a little bit lower than that.”

Exports fell

Last week’s trade data showed his resolve will be sorely tested. Exports unexpectedly fell for the second consecutive month in March, down 6.6 per cent year-on-year after an 18.1 per cent slide in February, the worst figures in more than four years.

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Imports fell 11.3 per cent, their weakest performance in 13 months.

The fall in imports is of particular concern, because it points to weakness in consumer demand and in manufacturing, two pillars of growth in China.

Beijing has made a couple of minor moves to help support expansion, including the announcement of tax breaks for small firms and plans to speed up some infrastructure spending, including the building of railway lines.

“It appears that we underestimated the degree to which distortions caused by the over-invoicing of trade a year ago are holding back export growth. These distortions appear to have resulted in exports to Hong Kong and Taiwan, via which most of the over-invoicing took place, contracting by 42 per cent in year-on-year terms last month,” he said.

Distortions by inflated data a year earlier mean exports may actually have increased by 5 per cent to 8 per cent in March from a year earlier, improving from a pace of about 3 per cent in the first two months of 2014.

Last month, Li announced a mini-stimulus, a raft of measures including railway spending and tax relief to support growth.

“Premier Li’s speech . . . at the Boao conference again confirmed the government’s ambiguous policy line – it can tolerate a slightly slower growth rate, but remains ready to help and ensure that this year’s economic objective is met,” said UBS China economist Wang Tao.

“Indeed, the government has already shown signs in recent weeks of accelerating project approvals and construction in support of growth, including in infrastructure areas such as railways and shanty town renovation,” he added.

The recovery in the euro zone and the US means the outlook for the Chinese economy remains positive.

Barclays Bank has lowered its GDP forecast for the first quarter to 7.2 per cent year-on-year, from 7.3 per cent.

“Our revision reflects more signs of soft domestic and external demand in Q1,” the bank said in a statement. “We continue to expect investment and construction activity to accelerate following project announcements by the central government and local governments since mid-March. We maintain our full-year GDP growth forecast of 7.2 per cent and look for a recovery in quarter-on-quarter growth momentum.”

Other agencies to cut the outlook include the World Bank, which expects growth to ease slightly, to 7.6 per cent this year from 7.7 per cent in 2013.

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